Vesuvius : Leader in Molten Metal Engineering

[rkgautam]

One needs to look into Foseco and/or Vesuvius (both are Vesuvius group companies). They look quite impressive in terms of return ratios, sales/pat growth, almost debt free, consistent dividends, enjoy strong competitive advantage that comes from experience as well as performance in India as well as abroad, able management that looks investor friendly as well. The market has rewarded both these companies by giving a multiple of ~15x (have traded at higher levels as well). Low liquidity could be an issue with some. Strong macroeconomic blows or difficult times for steel industry could really test their metal. Very little available on Foseco (and Vesuvius) on the internet, so could give an early mover advantage, but need to get a strong grip on value drivers and any associated risks.

Views invited.

[hitesh2710]

http://www.valuepickr.com/forum/not-so-hidden-gems/795669699#469849126 Link: …/…/…/not-so-hidden-gems/795669699#469849126

I had put up some details on foseco here.

[rkgautam]

@hitesh2710

had put up some details on foseco

**

Oops. My bad. Glad to see a post from you on this company - I was wondering anyway how could you miss this one

Speaking of which, don’t you think this one is a better pick than IFGL?

Donald - would it be possible for you to move the relevant posts above to Foseco thread started by Hitesh? Thanks.

One needs to look into Foseco and/or Vesuvius (both are Vesuvius group companies). They look quite impressive in terms of return ratios, sales/pat growth, almost debt free, consistent dividends, enjoy strong competitive advantage that comes from experience as well as performance in India as well as abroad, able management that looks investor friendly as well. The market has rewarded both these companies by giving a multiple of ~15x (have traded at higher levels as well). Low liquidity could be an issue with some. Strong macroeconomic blows or difficult times for steel industry could really test their metal. Very little available on Foseco (and Vesuvius) on the internet, so could give an early mover advantage, but need to get a strong grip on value drivers and any associated risks.

Views invited.

http://www.valuepickr.com/forum/not-so-hidden-gems/795669699#469849126 Link: …/…/…/not-so-hidden-gems/795669699#469849126

I here.

**

[vivek]

Both are good companies. Just that both are exposed to the vagaries of the economy. However, consummables like refractories and metallurgical chemicals shouldnt face too much of a problem. Among the two, Vesuvius is better because of the fact it has ramped up capacity quite significantly. Foseco is a wonderful dividend distributor.

As a disclosure, I have been gradually reducing Foseco and vesuvius in my portfolio as I had to generate funds for buying the stocks I wanted to accumulate. Otherwise, no problems with these companies.

[bharat19]

Vesuvius India (known as Vesuvius Refractories Ltd before November 1992) was incorporated in September 1991. The company is promoted by the Vesuvius group, UK, which accounts for about two-thirds of the worlds continuous cast refractory market. The Vesuvius group is part of the Cookson group of companies, which is into ceramics, electronics, and precious metals.

Vesuvius India manufactures specialty ceramics, refractory products, and control systems for industrial applications. It primarily caters to the steel and foundry industry in the process of continuous casting of steel and transfer of molten materials. The company also supplies refractory products for application in industries such as aluminum, cement, lime, mineral processing, hydrocarbon processing, and power generation. It has factories at Kolkata, Mehsana, and 2 plants in Visakhapatnam…
The Vesuvius Group continues to consolidate its positions in India, China and South America, their three strategic areas of development, and has been extremely supportive of their Indian operations and continues to provide constant support in terms of technology, systems, manufacturing etc.

Chairman : Mr Biswadip Gupta is a BE (Metallurgy) and MBA and has over 44 years’ experience in the steel and refractory industry. He is associated with the Vesuvius Group since 1979 and was instrumental in setting up the Indian operations.

Company follows Dec to Dec Calender and thus most of the details available are as of December 2017.
The Company has shown good growth in past.
Compounded Sales Growth around 10% over 3 , 5 , 10 Year Period.
Compounded Profit Growth 10% over 3 , 5 , 10 Year period
ROEs around 15%
ROCE around 25%
Company is debt free and promoter holding around 56% without pledge.
MFs (Reliance , Sundaram and HDFC) own around 20%
No equity dilution
Dividends paid around 15-20% of profits on consistent Basis
345 Cr of Cash and Equivalents on Dec 2017

The constant OPMs and Sales are very consistent and does not give any impression of cyclical nature of the business.
Orient Refractories , Foseco also have similar quite of growth with strong Foreign Parentage.

Negatives :
CSR spend is 0.27% of Profits
Receivable of Rs 20 Cr from certain customers currently under insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 which the Company considers good and recoverable.
Related Party Sales : 101 Cr (Around 11% of total Sales)
Related Party Purchase : 112 Cr

Vesuvius products have a short service life due to wear caused by the high temperature, high thermal cycling and the erosive and corrosive attacks they suffer. Due to the specialised nature of our products and the high volume in which these products are consumed, Vesuvius has developed close, collaborative relationships with customers together with an extended global manufacturing network aligned with customer locations. Vesuvius focuses on gaining a fundamental understanding of customers’ processes and delivering systems and products that are mission-critical for the demanding applications in which they are used. ~ AR2017

@hitesh2710 @ayushmit Looking to know your views that how do you see these companies like Foseco , Orient Refractories and Vesuvius. How one should approach towards these companies. The ARs hardly provide any greater details about the business.

[Jitendra_Gorasiya]

As stock showing momentum on month chart , is there any thing happening fundamently changing as the bottomline remain steady since from 2017 and also the of vesuvius india peer Rhi magnesita done very big capex in 2019 , and i show the cwip is 80cr is there any capex announced by the management ,I DON’T find any concall or related information .

[Surender]

About:

Vesuvius India Limited began commercial operations began in July 1994. The company is headquartered in Kolkata (India) with around 55.57% of its equity share capital held by the parent [Vesuvius plc] company. Vesuvius India Limited manufactures products in four pan-India locations (Kolkata, Mehsana and Visakhapatnam (where it has two units).

Products:

• Flow control refractory solutions: Provide consumable ceramic products, innovative systems, cutting-edge robotics, advanced digital services and technical assistance to the global steel industry. These products and services are customised to contain, regulate, and monitor the flow of molten steel in the continuous casting steel manufacturing process.
• Advanced Refractory Solutions: offer specialised refractory materials and advanced installation technologies comprising of modern mechatronic solutions, computational fluid dynamics capabilities, and laser technology.
• Digital measurement refractory solutions: products to control and monitor customers manufacturing processes. The portfolio includes temperature sensors, oxygen, hydrogen and sublance probes, as well as iron oxide and metal sampling tools for the steel, aluminium, and foundry industries.
• Crucible refractory solutions: Products offered include Pitch Bonded Silicon Carbide Crucibles for the aluminium and copper alloy industries while its Clay Graphite products are used by the railways wheel factory.

Customers:

• Steel producers and manufacturers of steel production equipment as our products accompany the steel-making process. The specialized refractory materials are subjected to extreme temperatures, corrosion, and abrasion, and are in the form of powder mixes, which are spray-applied or cast onto the vessel to be lined (monolithic) and refractory shapes (e.g., bricks, pads, dams, and other larger precast shapes). An integral part of our success depends on our best-in-class installation technologies which use robots and lasers to track the performance of installed refractories, as well as the high level of collaboration with customers.
• The steel and foundry industry comprise the biggest set of our customers which are cyclic and accordingly, we are impacted by the developments taking shape in these industries.
• About 70% of the refractories that are manufactured find application in the steel industry, 7% in the cement industry, 6% in non-ferrous industries and the balance in other industries.
  

Recent Capacity expansions:

• June 2022: Purchase of 22 acres at Parwada (Visakhapatnam) for building an industrial complex named Visakha
• Dec 2022: Completed the expansion of our VISO capacity (Kolkata plant)
• Mar 2023: Completed the expansion of and Precast capacity (Visakhapatnam) & started the construction of two new manufacturing plants (Mould Flux and Basic Monolithics) to service India and South-East Asia, expected to be come operational in 2024. These plants will occupy a smaller space inside the Complex, leaving a significant part to be allocated for subsequent expansions and the extension of new product lines.

Update from Parent [Vesuvius PLC] company’s AR and Investor Presentation:

China is now targeting net zero [decarbonization] by 2060 and limiting crude steel outputs and exports. long-term growth will mostly come from emerging regions, in particular from India and South-East Asia, EEMEA and Latin America.

Indian Steel Industry Outlook:

• The Indian government’s continued thrust on infrastructure will help the country achieve its vision of doubling crude steel production capacity from 150 MTPA to 300 MTPA by 2030 and 500 MTPA by 2047. Vesuvius plans to draw further from its global portfolio in line with the growing appetite for steel in India and foreign market.
• The Union Cabinet approved the PLI scheme for specialty steel. The scheme is expected to attract investment worth ~Rs. 400 billion (US$ 5.37 billion) and expand specialty steel capacity by 25 million tonnes, to 42 MT in FY27, from 18 million tonnes (FY21)

KPIs:

MDA Commentary:

*Nitin Jain is the MD, joining on March 16, 2021. Materials Engineering degree from NIT Jaipur, Master of Science degree from Case Western Reserve University, USA and MBA from Ohio State University. experience in leadership roles in M&A, operations, product management, sales and technology across North America and Asia.

Key comparative points of the nearest competitor (RHI Magnesita India Ltd):

Positives:
• Wider client base, includes MSME
• targets the full refractory market
• Open for exports to South+West Asia and Africa Mkts [15% of FY23 revenue]
• 30% revenue from Non-Steel Industry
Negatives:
• Synergy unlocking from Acquisitions
• Debt + Planned ~350 crores capex for Dalmia modernization

Risks:

• Immense dependancy on large crude steel manufacturers.
• Limited opportunity size, considering they are focussed on Indian market and that too in selected areas.

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Vesuvius India Limited Investors Meet May 03, 2023 | Management: Biswadip Gupta - Chairman | Patrick Andre – Director | Nitin Jain – Managing Director | Rohit Baheti – Finance Director & CFO

• How you are seeing the progress of the company? 2022 for Vesuvius has been very challenging: lot of projects got held-up, delayed because of a shortage of manpower. …Russian/Ukrainian war, the logistic costs for all raw materials went up. Then there were two major consolidations that happened, one was on the steel plant side. Virtually just three major players now. In Indian context, a major issue in terms of purchasing power goes to the purchasers now. You cannot afford to lose a customer because we lose that, you lose a big customer. Two was because the export market was going down, a lot of Indian refractory companies who were predominantly exporters, had enough capacities to bring their materials into the country and that somehow causes disturbance. we had I think three different CEOs in a span of 2-3 years, which is not an easy thing for a company. We did not have so many CEOs in the whole of history. So, with these things, the performance as you have seen in 2022 was to my mind, a fairly satisfactory performance. It is a watershed year for us because after 2000 when we acquired part of CUMI in Vizag, we had not done any major investments. We invested and completed two major expansions, one in Kolkata, one in Vizag (bought fresh land, 21.8 acres) at a cost of about close to INR100 crores between the two of them. Vizag- announced and laid the foundation stone and work has already started on two projects for two different product lines: green field plant for mould flux, which are currently imported and used on the casters, where steel is transformed between liquid to solid. Also starting up a basic monolithic plant which is also going to be a top product line - we are missing a lot of businesses in those two areas. This land has a lot of potential to have new businesses, new product lines in the future which we are looking into very, very seriously. Forinorganic expansions , we have kept enough funds. Working capital Management which has been quite efficient.
• For the two new plants which are coming up, the total capex will be close to INR93 crores, the basic mono and the flux plant we are talking about. we have an ambition to double our business in India in the next 5 to 10 years [only considering ORGANIC Growth, Inorganic will be additional]
• We are a low capital-intensive business, and we want to remain a low capital-intensive business and the reason why we are not and we do not want to be integrated into mining.
• We grow through technological differentiation with a low capital intensity and that’s the reason why our business always remains free cash flow generative whether in good times or in bad times.
• It is not a strategy of Vesuvius India to develop exports. We are very clear and transparent. We have at a global Vesuvius Group level a strategy of being local.
• each region has its own geopolitical vision and we believe that those people producing locally will have an advantage.
• The new products which you are going to add, what will be the potential size of the market and what kind of market share we are targeting over the longer period of time in that? ***this is confidential information about what market share we are targeting, so we will tell you when we get there. But what I can tell you is that, first, I have to confirm that the decision we have made to introduce the mould flux product line in India is not the only one we will make in the coming years. There will be other similar decisions taken in the coming years to introduce also other manufacturing product lines for a product which for the time being, are not manufactured by us in India. And the second thing is that, generally when we introduce something we have strong ambitions and that we never introduce a product line to keep the status quo in terms of what our presence is on the market.
• We have some appetite for inorganic growth, but we have two important things. need two criteria for a company to be attractive to us. first …should bring us something from a technological point of view. second … should be available at a reasonable price
• Potential for margin, long term margin of Vesuvius India is probably even greater than what you’ve seen in 2022.
• Customers realize that the total cost of ownership of refractory (with Vesuvius) is better than others. So, the recovery that we see today is both in the sense of market share gain, where we have a lot of recovery of market and the new solution that we have been able to introduce.
• larger customers are more inclined towards better solutions. They are willing to pay for it, and that’s where we excel. So, we also see that customers, as they are focused on high-quality steel, high grades of steel, they’re looking to improve their own operations, we see that increasing appreciation for solutions, and that’s where we excel. So, it’s a mixed bag of a story, but overall, as the volume picks up, you have a stronger trickle-down effect in your bottom line.
• Management fees of Vesuvius are set at a level where it is the same for all regions in the world, which is a requirement from a tax point of view.This is something that we are reviewing regularly. Depending on the level of activity of the respective regions, because globally, and these are OECD rules, so this is not something specific to Vesuvius, for Management fees to be acceptable from a tax point of view, you need to use the same rules everywhere in the world.
• 95% plus consumables. Our business is consumable. We nearly have no capital goods. We are really, really consumables, and we will remain so, even if we are developing in robotics. Robotics for us is, I don’t know if the analogy with coffee, but robotics is for us the coffee machine of an espresso system. So, robotics is a way to accelerate the sales of consumables. So, we sell a little bit of robotics, but we sell robotics exactly like a coffee machine is made to make you consume more coffee capsules. Robotics for us is a way to accelerate the penetration of our consumables with our customer base.
• Service income that has grown from INR300 crores to INR600 crores, and that’s the whole delta that has come for the full year in the total revenues. Second, need a clarification on the press release that we had, that we had announced INR500 crores of capex plans, but what I can reconcile is the INR90 crores capex plan that you have given clarity on. ……….It has increased over last year because we had a number of new projects, new capacity which came up with our own solutions and then some existing customers who also moved to our total service Management. So that’s the background. Now going forward, whether it will go up or not, it’s difficult to comment, but I don’t see any reason for any structural change significantly either way. service contracts are basically for those big groups. Today, if you see a differentiator, a key differentiator between Vesuvius and other competitors, one of them is that we are very strong in service contracts, whereas others are trying to develop this and they are not as good as Vesuvius at the moment. ….already invested in between Kolkata, Vizag, and the acquisition of the Vizag land between INR150 and INR200 already. The other ideas that we have in mind over the coming three to five years will bring us, in my opinion, probably above the INR500 crores.
• In Asia, we have two main manufacturing hubs. One is India. The other one is China. India is serving primarily India. And this is the main objective of India, is to serve India but is also exporting flow control products to Southeast Asia. The Southeast Asian market is growing rapidly. Vietnam in particular is growing rapidly. And I think that Vietnam in particular, but for Southeast Asia, for flow control products will become relatively sizeable in the years to come. And the natural supplier of this Southeast Asian market for flow control products, again, not for advanced refractories, but for flow control products will be India.
• Our largest competitor, we’ve seen that the margin that they are delivering is between high-teens and low-teens. So, what I want to understand is, sir, just mentioned that the service income has grown and that’s the whole data. What I want to understand is this gap in the margin. Is that because of product mix or is that because we’re not fully increasing? ***not just in India, worldwide, these companies have product ranges where Vesuvius primarily had not been active. It doesn’t mean that we are not going to be active. And beyond that, we cannot discuss at this moment and this is where I think Patrick Andre was holding back. So, yes, they have a basket of products that we do not cater to for the moment.
• They made a recent acquisition [Hi-tech and the other is Dalmia-OCL] that you also just spoke about. DOCL acquisition that’s happened, do our products compute with those products? *** High-tech as a company is making good refractories. But this Hi-tech is 30 years old Vesuvius-like plant. When I built this plant in Kolkata 30 years back, the same equipment suppliers, the same people who manage those, same companies have built that plant. One tenth the cost. We got 50% of our capacity enhanced on product technology, on the same product line. Now, to bring it to our levels, the high-tech plant, they might need to do a lot of changes, a lot of investments. Dalmia-OCL has been a primarily big brick maker. Viso flow control products have a Japanese technology, which they are also a margin, also player, but they’re not a big name in India, even in Indian markets. To convert that into a real threat to Vesuvius, it will take a lot of effort, a lot of time, a lot of money, and a lot of technology. Vesuvius is not prepared for those things. So, therefore these two acquisitions do not affect us at all.
• We are not energy intensive. Probably by the end of next year or even by the end of this year, there will be no need for Russian gas in Europe anymore. New sources of energy are coming onstream
• If I look at the gross margins of both the companies, RHI India, and Vesuvius India they are probably the same at 40%. And below that then, the difference in margins comes from, one big issue is the royalty, which is about 3.5% for us, versus they take about 0.8%, 0.9%. So, 2.5%-3% difference comes from there. And then there is about 2.5% differential between the employee costs and the other variable costs. So, they are at 18%, we are at about 12, 12.5%. I believe that this royalty might not be going down as low as the RHI. But then there are other levers. So, just wanted to get some sense that, you know, what are the other levers that you can go to the RHI level, or is the royalty, a big factor, which will not happen? So, then the margins will remain, and the difference in margins between the two companies will remain where it is. *******Patrick Andre: I think you should look at the coming years and make your opinion based on what will happen, what will happen in the years to come.
• Analyst: Because the gross margins are the same, so then it doesn’t… ****Patrick Andre: We will see if it will remain the same, we will see. Rohit: And if you notice from last year, the margins increased by 3%. And I think as Patrick Andre mentioned, hopefully, we are on the right track probably for further margin improvement, but hard to comment anything further on that.
• Last year I remember that the total market size of refractories in India was about INR8000 crores, which was mentioned in the AGM. And sir said that about 20% to 20% is the, you know, the size of the market that we cater to where we have 55% market share if I am not wrong. Now, with these new product introductions, where can we, like, perfect INR8,000 to INR9,000 crores market size in India? Where can, how much can we cater to out of that? ***Patrick Andre: I think the first is too soon to answer your question. And second, we are not, and we will not, we will continue not to target the full refractory market in India. So, we are not, and we do not want to be a generalist refractory supplier. So, you see, this is what makes Vesuvius different from others. Vesuvius is absolutely not interested in supplying every type of refractory. Other companies have different strategy. We don’t want to be a one-stop shop where you can buy whatever refractory you need. We are only interested to expand in this sub-part of the refractory market where technological differentiation is possible.
• Analyst: Because that has to show in the margins, which is not getting shown. Because the other player is catering to everything, and his margins are better than ours. So, something is not getting shown.*** Patrick Andre: we do not believe that being a generalist brings value. Because when you are in the commoditized part of the market, anybody can enter the market. And if it’s not today, it will be tomorrow. When there is no barrier to entry, there will always be somebody to enter. We are looking at a longterm strategy. We are not interested to remain or to go in those places where there is little barrier to entry.
• The natural growth of the refractory market is a little bit less than the steel market, not more, a little bit less. And our ambition is to grow faster than the steel market. So, it means gaining market share on the product lines where we decide to be active.
• Rajesh: So, last 10 years or so, we have seen a very flattish kind of manufacturing revenue growth. I understand from the conversation it would be led to some of the products that we didn’t have globally as well as in India some of this would be because of constraints. And also, business solution side, the test and advantage of both are good now if they are having global, targeting global more product addition. Carrying more product capacity addition in India and as we believe in FY’22 numbers, we believe the ------ is also improving, next five years the growth to be better than last 10 years. Is this something that we can assume? ***Nitin Jain: It’s a good assumption. I mean the steel industry (growth) itself in the next five years seems to be better than the last five years. So that itself creates a trajectory. Then on top of that if we’re introducing products that we did not have in the Indian portfolio, but we had in the global portfolio. So, for example, mould flux, it’s one product that we talked about, we had mould flux, Metallurgica for over a decade. So, we started to understand our market for mould flux over the last few years. Now we believe we are mature enough and we understand the market well, and the market is ready to accept the solution.
• How does green steel affect us? ** don’t see any negative impact on our business of green steel, … the vast majority of development in India is still using the very efficient, but also historical production route of blast furnaces. And this remains, at least today, in India, the main route being chosen by steel producers for their expansion. So, we don’t see it yet, I think it will come at some point, we don’t see yet any inflection, any big inflection points in India. We are starting to see that in other regions of the world.

@Chandragupta : Sire, Any view on this business? I see that you have done deep work on it’s competitor (RHI Thread).

Disc: No position
Sources: Company’s Public Filings

[Chandragupta]

Hi @Surender, Thanks. I have not studied Vesuvius in much detail, but my guess is whatever has worked well in case of RHIM will apply equally to Vesuvius as well. Some businesses are inherently good businesses to invest in, and refractories seem to be one such. The moat is the same.

[Utsav_Basak]

I came across this firm, and noticed that in the Analyst Call in May 2023, the management mentioned that the firm had been going through turmoil and went through 3 CEOs in 2-3 years. However, when I was looking for it on the internet, I couldn’t find a news article about it. Does anyone have any info on that? I was trying to understand what led to the turmoil, and if its impact on the valuation is still lingering.